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Published: October 27, 2009
 / Winter 2009 / Issue 57

 
 

Profits Down, Spending Steady: The Global Innovation 1000

Indeed, for many companies, the recession has catalyzed innovation, by forcing them to think more carefully about their new product portfolios and their innovation processes and costs. Notes IBM’s Sanchez: “When you’re in a situation where you’ve really got to be judicious, to do more with less, that really drives a need for innovation and a level of creativity that you might not otherwise have in normal times. Increased innovation doesn’t always have to be about more dollars. It’s about how you use those dollars and how you accelerate some products just to bring them out.”

Products and Cycles
Every innovation executive we interviewed cited the constraints of the product development life cycle as an additional reason that R&D spending could not be cut in the short term. The reason is simple: The length of time it takes to develop a new product varies significantly from industry to industry, but it is measured in years rather than months. A new car, for example, can take up to four years, and a new drug more than a decade. Yet the typical recession rarely lasts more than a year. That dynamic has been a significant force in mitigating the negative impact of this recession on innovation spending. (See Exhibit 9.)

Harman International is a $3 billion maker of high-end car audio and “infotainment” systems, as well as professional and consumer audio equipment, with 75 percent of its sales coming from the automakers. As the company entered the recession, it was in the process of developing 13 different car systems for automakers, none of which could be delayed. “Through this downturn, we’ve had more engineering in terms of new infotainment platforms than in the history of any infotainment supplier,” says Harman’s Lardon. “These programs have to be started from one to three years in advance of their actual launch. The number of cars sold, of course, is down, and that’s been reflected in our top-line revenue. But that didn’t mean that we could reduce the engineering during this time. We had to get these things out to launch.”

The competitive dynamics of the computer and electronics sector can be even more intense. IBM’s Sanchez, who runs the unit that makes Intel-based servers, notes that the product generations in his business sometimes take longer to develop than the products themselves last in the market, so the product development cycle demands constant refreshment. “You cannot all of a sudden just dry up the investment pipeline,” he says, “because in this particular segment of the marketplace, if you miss a cycle, you’re out of the market.”

That doesn’t mean, however, that product development cycles can’t be shifted in response to the economic cycle. Alan Grant, senior vice president for R&D in developing markets at Kraft Foods Inc., concurs with the view that development cycles can be inflexible — even in consumer packaged goods, where companies develop thousands of products every year. “The reality is that given the retail cycle, our [corporate] customers — if not our consumers — expect us to bring to the market some level of innovation in core categories at various times of the year,” he notes. At the same time, however, the downturn has forced Kraft to make smarter decisions about the timing of product launches. “Before the recession,” says Grant, “some of our developing-market businesses were considering some new premium initiatives. We never actually stopped development work on these products, but in some cases we chose to delay their launch and focus instead on launching more price-sensitive products to deal with the drop in consumer purchasing power.”

Innovating for the Upturn
Ultimately, to be sure, the global economy will recover; some economic forecasters argue that the recovery began in the summer of 2009. The executives we spoke with emphasized the need to remain competitive, and to make sure they’re ready for the recovery. That’s when those companies that have succeeded in maintaining the pace of innovation, such as Harman International, will find themselves at a real competitive advantage. Says Harman VP Lardon, “When we emerge from this downturn, we will emerge leaner, more efficient, and more technologically capable. This has been both a business mandate and a cultural imperative for us. Being an innovation leader and having a best-in-class cost structure are not mutually exclusive.”

 
 
 
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Resources

  1. Barry Jaruzelski and Richard Holman, “Innovating through the Downturn: A Memo to the Chief Innovation Officer,” (PDF) Booz & Company white paper, March 2009: How companies can tailor their product and technology initiatives to new market realities and refocus their investments on their core R&D and innovation capabilities.
  2. Barry Jaruzelski and Kevin Dehoff, “Beyond Borders: The Global Innovation 1000,” s+b, Winter 2008: Last year’s study revealed, for the first time, how R&D money is benefiting most parts of the world.
  3. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: This study, identifying two primary success factors in innovation strategy: aligning the innovation model to corporate strategy and listening to customers every step of the way.
  4. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Smart Spenders: The Global Innovation 1000,” s+b, Winter 2006: This study, uncovering a small group of high-leverage innovators who outperform their industries.
  5. Zia Kahn and Jon Katzenbach, “Are You Killing Enough Ideas?s+b, Autumn 2009: How companies can improve their innovation performance by getting their formal and informal organizations in sync.
  6. Alex Kandybin, “Which Innovation Efforts Will Pay,” MIT Sloan Management Review, September 25, 2009: How companies can use an incisive analytic tool to gauge their overall R&D effectiveness.
  7. Paolo Pigorini, Vinay Couto, Ariel Fleichman, and Carlos Gondim, “Reshaping Your Company Business Model: Building for the Future During the Downturn,” (PDF) Booz & Company white paper, June 2009: How to best implement long-lasting and effective initiatives aimed at fundamentally improving the way companies operate.
  8. C.K. Prahalad, “The Innovation Sandbox,” s+b, Autumn 2006: To create an impossibly low-cost, high-quality new business model, start by cultivating constraints.
  9. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/innovation.
 
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